How are Power Purchase Agreements shaping the energy market?

Marc Barrington, CEO of SIMEX ZEN Energy, will be presenting at Australian Energy Week 2019. We caught up with Marc to discuss the risks and opportunities of corporate Power Purchase Agreements.

There has been a lot of noise around Renewables Power Purchase Agreements (PPAs) – for background to our readers, could you tell us how your work intersects with the topic?

SIMEC Energy Australia is a generator, a retailer and by virtue of its majority shareholder (Liberty/GFG) a large consumer of energy. This means we understand all sides of the energy market like few other market participants. We have executed 3 long term PPAs with 3rd party developers, this coupled with the fact we are also a developer of large scale renewable energy projects, we also know how to create sustainable energy, that is reliable and delivered at globally competitive prices to underpin the future of modern business and industry in Australia. As CEO, I consider that our approach delivers reliable, sustainable and competitively priced energy for our customers – in a way that is matched by their individual requirements.

What is your understanding of how a PPA works?

At their most basic level, a PPA locks in a price and a notional energy volume for both a buyer and a seller of electricity for a specific period of time. It is for all intents and purposes, the passport to a development project either achieving financial close or remaining on the shelf. Although I note that banks are becoming more comfortable with merchant risk over time. A PPA will also include reference to what happens in the event of a failure to meet the contract terms and conditions including, the payment of liquidated damages.

Why do you think C&I customers are drawn to PPAs?

I think that C&I customers are drawn to PPA’s as they are seeking to lock in prices that are lower than current market offers. I note that there have been a number of corporate PPAs entered into over the last 18 months including the Bluescope Steel and Telstra deals.

I do have concerns though that some C&I customers are failing to understand what a straight PPA with a renewable energy generator actually delivers which is, variable energy supply at a fixed price. Unless customers are actively matching their load with generation output in times of high market prices, which is actually quite difficult to do, there could be a costly mismatch for them. I would encourage C&I customers to consider engaging a retailer, such as SIMEC Energy Australia, to discuss the benefits of a retail contract in managing this risk.

How do you anticipate energy retailers (that specialise in business retail) will respond to what is essentially a threat to their market share?

I genuinely consider that customers of all shapes and load sizes are becoming increasingly informed as to the range of energy providers that are currently active in the market and what products and services are available to them. I think that this is a good thing, and a reflection of the positive benefits of competition. I personally prefer to focus on our customers’ needs – and the growth of our business – as opposed to the strategies of other market participants. However, I do think that customers are ultimately the beneficiaries of competition and can only benefit further from increases in the range of market products that are made available to them.

For those customers interested in low emission generation and its abilities to deliver better energy cost outcomes, I would encourage them to consider engaging a retailer such as SIMEC Energy Australia to discuss the benefits of a retail contract which uses renewable energy and is firmed by us. I consider that we are well placed to deliver competitively priced, clean, renewable energy without the volume risk as I mentioned earlier.

From the perspective of a large energy users, what are the key benefits and drawbacks to engaging in a PPA – and are there any particular salient risks?

The key benefits of a large energy user entering into a PPA is simply that the buyer will lock in a price for its electricity over the longer term (e.g. 15-20 years) though, as I have stated, this does not lock in energy volumes.

Clearly, the biggest risk to an energy user entering into a longer term PPA is the risk of market prices falling substantially lower than where it has contracted, commonly referred to as ‘tail-risk’. Fundamentally however (and noting that businesses should seek independent advice and our vested interest as a project developer!), I think that there are real benefits to be delivered to those businesses seeking lower energy costs – with an environmental element – that they that lock in their electricity load via longer term retail agreements that use renewable energy as their base and allow the experts to manage the variability in the background.

Is a PPA a good option for all businesses? E.g. can a very energy intensive business like a smelter engaged in one?

Clearly each business, that is seeking to contract its electricity load in the market, has to assess and consider its own business needs against the range of different market products that are available. However, I consider that a PPA can offer businesses the opportunity to lock in a price for electricity over the longer term, thereby giving them greater confidence as to their future electricity costs. As I stated earlier, I think the benefit to end users from PPAs flows from the actions of innovative energy companies – such as SIMEC Energy Australia – that can take renewable energy PPA’s, lock in firming generation capacity and derivatives in order to manage variability and manage market risk. Thereby creating sustainable energy, which is reliable and delivered at globally competitive prices. Additionally, a PPA may also provide opportunities to facilitate other value added products and services such as demand respond/load shifting which can create ‘win-win’ value sharing – for both parties.